Hernandez v. Sohnen Enterprises, Inc., 102 Cal. App. 5th 222 (2024), reh’g denied (June 3, 2024)[1]
Factual Background
In 2016, Plaintiff Massiel Hernandez (“Hernandez”) executed an arbitration agreement with Defendant Sohnen Enterprises, Inc. (“Sohnen”), that stated, “This Agreement is governed by the Federal Arbitration Act (the “FAA“), 9 U.S.C. [section] 1, et seq.” On July 16, 2021, Hernandez filed a complaint against Sohnen for disability discrimination, Labor Code violations, and related causes of action.
On November 8, 2021, the parties stipulated to stay the trial court proceedings and arbitrate pursuant to their arbitration agreement. The trial court entered an order in accordance with the terms of their stipulation. Hernandez then filed a demand for arbitration with the Judicial Arbitration and Mediation Services, Inc. (“JAMS”). On April 7, 2022, JAMS sent notice to the parties stating that filing fees were due upon receipt. Sohnen paid the filings fees on May 13, 2022, more than 30 days later.
The Decision of the Trial Court
Hernandez subsequently filed, and was granted, a motion to withdraw from arbitration and vacate the stay of court proceedings pursuant to California Code of Civil Procedure section 1281.97. That section was added to the California Arbitration Act to assist consumers and employees who found themselves in a “procedural limbo” because they were required to submit a dispute to arbitration, but the entity enforcing the arbitration agreement had not paid the arbitration fees required to proceed. Specifically, section 1281.97 provides that, if such fees are not paid within 30 days of their due date, the non-paying entity “is in material breach of the arbitration agreement, is in default of the arbitration, and waives its right to compel arbitration under [s]ection 1281.2.” Applying section 1281.97, the trial court found that Sohnen had materially breached the arbitration agreement and waived its right to arbitrate.
The Decision of the Appellate Court
Sohnen timely appealed the order under section 1281.97, and the appellate court reversed the trial court’s finding. In reaching its conclusion, the court found that the FAA—which does not contain a mandatory waiver provision—preempted the California Arbitration Act, including section 1281.97, because the arbitration agreement plainly stated that “this agreement is governed by the FAA.” Although parties can avoid preemption by expressly agreeing to apply state law to their agreements, this statement was broad enough to encompass both the procedural and substantive procedures in the FAA, and there were no provisions within the arbitration agreement that explicitly referred to California law.
The court further reasoned that, even if it were to conclude that section 1281.97 applied, it would still reverse. In reaching this conclusion, it noted that Section 2 of the FAA embodied an “equal-treatment” principle, meaning that “[a] court may invalidate an arbitration agreement based on ‘generally applicable contract defenses’ like fraud or unconscionability, but not on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” Following this principle, the court noted that a state law that discriminates on its face against arbitration would be preempted by the FAA. The court found that section 1281.97 violates this equal-treatment principle because it mandates findings of material breach and waiver for late payment that do not generally apply to all contracts or even to all arbitration. By imposing a stricter requirement, the court found that it makes it harder to enforce arbitration agreements in those matters, and is thus preempted by the FAA.
This Article was originally published in the North America Newsletter.
